Office tenants evaluating their space in Denver face a real estate market that seems cleanly divided. On one side are the new, desirable Class A and Class AA buildings that companies are eager to occupy as they hope to lure employees back to in-office work. On the other side, Class B and C office buildings face widespread vacancies and foreclosures—dominating the local headlines.
Class A and AA are the highest quality buildings in the most desirable locations with amenities such as fitness facilities, tenant lounges and coffee bars. One of Denver’s most active submarkets where many of these buildings can be found is the Cherry Creek North submarket. This is arguably the most expensive submarket in a six-state region, where the five most recently developed properties are nearly entirely leased or pre-leased. Some of the buildings were 100% leased prior to construction beginning.
With such strong demand, these more desirable buildings are leasing at premium rents higher than were achieved pre-COVID, in some cases, exceeding $70 per square foot. Even with such high rental rates, there is minimal space available in the newest buildings. The Cherry Creek submarket has just 6.7% vacancy in Class A office space. Downtown Class A buildings hover around 20% vacant compared to Class B buildings which are near double this level.
Lindsay Brown, executive vice president at Hughes Marino in Denver, says the commercial real estate market is really a tale of two cities.
“Right now, it can be confusing for tenants looking for space, as their expectations are that rent should be half-off based on what they are seeing in the headlines about commercial real estate. Are there aggressive deals to be had? Absolutely, but not necessarily in the best buildings with great amenities, located in the best parts of town. As people continue to return to the office, companies are all looking for nicer buildings, buildings where the employees want to come to work. Many of the buildings that are struggling, the ones doing aggressive deals, are the buildings tenants don’t want to be in. Companies are willing to pay more to be somewhere their employees will come to work.”
Top 6 Strategies for Navigating Denver’s Divided
Commercial Real Estate Market
Despite the difficulties, Brown says that there are a number of strategies companies can employ to secure desirable office space in Denver—and great deals on leases—by bringing in an experienced broker who knows not just what space is listed as available, but also where a great deal can be created. They need brokers who know where Class A space may be hiding, and how to structure leases to include many of the improvements and upgrades that clients are seeking. Here are Brown’s 6 top strategies.
Find Class A space in a Class B building.
Sometimes desirable office space is hiding in plain sight. Hughes Marino’s Denver team can point commercial clients to modern, built-out spaces within more dated high rises where the previous tenant has made significant improvements. In other words, “great space in a good building.”
Seize the moment downtown.
With the market so soft in downtown Denver, says Brown, there’s an incredible amount of space available that can be retrofitted to meet clients’ needs. And, they can secure a strong deal as they wait out an opportunity to get into their dream space. Hughes Marino can help ensure that these spaces are secure if the building ends up in foreclosure or auction. “We have a good feel for how buildings are financed, who the investors are backing it and how likely it is to survive this cycle,” Brown says. “And we are able to negotiate the lease, so clients are better protected.”
Structure the lease for maximum value.
Many spaces require hefty remodel dollars and expect this money to come from the landlord. Landlords typically require longer lease terms to amortize these dollars. This can be a hurdle for tenants who want the flexibility of a shorter lease term. One successful strategy that Brown recommends is negotiating a termination right. This allows the clients to design the space they want now, taking advantage of the landlord’s money, without having to commit to an excessively long lease term.
Consider a sublease.
In cases where previous tenants have done a lot of buildout, subleases offer a great opportunity for commercial clients to get spaces with the amenities they want. Brown says that with subleases, new tenants can do a cosmetic refresh for minimum investment. Or they can structure the sublease to get free rent to offset the improvement costs.
Consider an early renewal.
Most business leaders don’t realize that despite multiple years left on a lease, in most cases, they can be renegotiated up to four and five years early. Many companies are paying too much—or need money for a remodel/refresh of the space—but the leaders think they need to wait until their lease is closer to expiration to secure a good result. Not true! Early renegotiations, downsizing and expansions are a specialty at Hughes Marino, and the rental savings and/or refreshed environment can do wonders for a business’ bottom line and culture.
Ensure the tenant comes first.
A number of big commercial real estate firms are now expanding their teams who handle buildings in receivership. The goal of a receivership team is to minimize the amount of pain the bank will experience. In other words, one of the goals of a receivership team is to maximize what they can get out of the tenant via higher rents and minimal concessions. Receivership teams often take over the leasing and property management of a building to better the bank’s position when a building goes into foreclosure. Meaning, everyone with the building is, by definition, not on the tenant’s side. “Having an advocate with no loyalties to the building or the bank is key in a market like the one we are in right now,” said Brown.
Hughes Marino is a tenant-representation firm and specializes in working on behalf of commercial clients—not lenders—to ensure they are getting the best deal and that their rights are protected.
